AsWarrenBuffettsaidin1998:“Ifoptionsaren’taformof
compensation, what are they? If compensation isn’t an
expense,whatis it?Andif expensesshouldn’t gointothe
calculationofearnings,whereintheworldshouldtheygo?”
Thedebateaboutoptionexpensinghasbeentendentious,with
those opposedto the practiceusing everyargument in the
book,buttherationalargument(infavorifexpensing)seems
to havefinally prevailed.Inthis section,we considerhow
accountinghastreatedemployeeoptionshithertoandhowit
proposes to treat them in the future.
Conventional Treatment
Manyoftheabusesassociatedwiththeuseofoptionscanbe
traced to accounting rules that have consistently
miscategorized and misvalued options. In particular, there
have been two key (and incorrect) assumptions that have
guided the accounting for options:
1.Exercisevalueisintrinsicvalue.Theaccountingrulethat
hasgovernedtheaccountingforoptionsgrantsatmostfirms
through 2004 is the Accounting Principles Board opinion
number 25 (APB25),whichdefinestheintrinsicvalueofan
optionasitsexercisevalueandrequiresfirmstoshowonly
this valueatthetime of thegrant.Sincemost firms issue
employeeoptionsat-the-money,thisessentiallygivesafree
pass to these firms; there is no exercise value for these
options,andtheaccountingviewoftheseoptionsisthatthey
are worth nothing at the time of the grant.
- Focus on exercise date rather than grant date. Closely
followingon thefirstassumptionis thebelief thatoptions
outstanding do not affect stockholders until they are